How Much is a Business Worth With 1 Million in Revenue?
Understanding business value is key when you’re searching for investors, working to acquire more capital, or preparing your business for sale. When a business reaches a certain revenue number, though, valuation becomes much more important. Business valuation with more than a million in revenue is absolutely key because it’s a tipping point for many potential buyers and investors alike. How much is a business worth with 1 million in revenue?
Overestimating the value of your company or undervaluing it is incredibly dangerous. No matter what your ‘why’ is, knowing the value of your company is key. Most business owners use a number of different options to value their companies. One of the best options, though, is to use the standard valuation formula of three times your gross revenue. So, if you’re making $1 million a year, your valuation then becomes $3 million. That can change based on your industry, though. For example, tech-based companies tend to use a formula that accounts for the number of founders, patents, and active users. This formula is usually $1 million per founder plus $1 million per patent plus $1 per active user. That allows you to account for the rapid growth and low costs this industry experiences.
How much is a business worth with 1 million in revenue? Why $1 Million in Revenue Changes Everything
The million-dollar mark is a big deal, and for good reason. It can mean the number of buyers for your company potentially goes up, as does the interest in investing with your company. More buyers mean a better earnings multiple, too, which could mean real negotiating power. Wondering why? It happens for a few different reasons. The first is frictional costs. You’ll spend the same amount in legal fees to buy a company that costs $500,000 as you would buy a company that costs $3 million. The larger the deal, though, the less those frictional costs matter, which makes purchases like these absolutely worth it. Another reason is the 5 to 20X rule of thumb. In most deals, the acquiring company is usually at least five times the size of the target company. That number ranges as high as 20 times. If the business is less than five-x, you’re literally risking one company to buy another. If it’s more than 20 times the size of the target company, the acquiring company doesn’t really need the business in the first place. Larger, more mature companies are looking for a minimum of 20% growth if they’re going to make an acquisition. Private equity firms drive the last reason. The value of your company moves up considerably if private equity firms become interested, but they don’t even start getting interested until your company hits the $1 million mark.
Once You Hit $1 Million
If your company has recently hit the $1 million mark, you want to keep that growth going. There are several things you need to do at that point to make it happen. Start by staying ahead of your cash flow shortages. This is one of the biggest reasons companies fail. Sale generation numbers mean nothing if during a growth phase you can’t produce the necessary cash flow to keep moving. Remember that with revenue growth comes greater expenses, so you’ll see far more cash leaving. Be as proactive as possible to ensure you have plenty of money on hand.
Additionally, you’ll become busier as your company grows, so you can no longer handle everything on your own. Hire the right people around you so you feel like you can delegate various tasks to them.
Don’t forget, too, to appreciate the value of your employees. This isn’t a feel-good statement. It’s quite literal. How much does each employee cost? How does that compare to how much revenue each one generates? You’ll need more people to handle your day-to-day business requirements after you hit $1 million, but hire too many people, and you could quickly lose those sales numbers to labor expenses. So, how much is a business worth with 1 million in revenue? Remember that it’s not just about revenue, it’s also about profitability. Understand your gross and net profit to ensure you remain a profitable enterprise. If you’re bringing in seven figures, but you have tight margins, then you’re obviously in danger of taking a loss. That top line doesn’t matter if the bottom line is a problem.
Don’t forget, too, that you need to invest your profits back into the company itself. You want a good free cash flow to help prepare your business for the next level. Whether that means new technology, additional research, or expanded inventory, reinvesting in your business is a good way to put the additional money to use.
We Can Help
So, how much is a business worth with 1 million in revenue? It depends. As your business continues to grow, understanding how to increase your level of profitability becomes more difficult. At AMB, we can help. Contact us today to learn more about our services.